Mondelez shares hit peak on news of restructuring plan

CEO says 'fewer roles' likely; move in works to blend its coffee business into new company

May 08, 2014|By Jessica Wohl, Tribune reporter

Deerfield-based Mondelez International announced Wednesday that it plans to push its $3.9 billion coffee business into a new company next year being formed with D.E Master Blenders 1753. (SANDER KONING, EPA)

Mondelez International Inc. laid out a new restructuring plan Wednesday and said it would soon combine its coffee business with one from a smaller rival as it looks for fresh ways to boost its results amid a slowdown in the global snacks business.

The Deerfield-based company's latest push to reinvent itself as a nimble snack-maker was a hit with investors, who pushed its shares to their highest levels since Kraft Foods Inc. separated in 2012 into two companies, Mondelez and Kraft Foods Group Inc.

Mondelez pegged the cost of its first major restructuring as a stand-alone company, which will take place through 2018, at $3.5 billion.

The plan may lead to more job cuts, though details are unclear.

"There's no question that there will be likely fewer roles in our organization in the future, but we're in the very early days now, so I really have no further specifics to share at this point," Chairman and CEO Irene Rosenfeld said in an interview.

Part of the reason for the October 2012 breakup of Kraft was to unlock the potential of the global snacks business, which includes products such as Oreo cookies and Cadbury chocolates. Since then, growth has cooled off in some emerging markets and in the global snacks business in general.

Rosenfeld was chairman and CEO of Kraft before the split. She has faced months of pressure to improve results, and Mondelez named activist investor Nelson Peltz to its board in January.

Mondelez shares jumped to a record high of $38.47 in trading Wednesday and ended the session up 8.2 percent, at $38.10. It was the highest closing price in the company's history since its separation from Kraft.

Historically, the categories Mondelez is part of have grown at rates of about 6 percent. Last year, the company's revenue grew 3.9 percent. This year, Mondelez expects global snack growth of 3 percent and expects its sales to be in line with that growth.

With the restructuring, Mondelez aims to squeeze $1.5 billion out of its annual cost base by 2018.

Mondelez cut 3,000 jobs last year as it started to shut some plants and cut costs in areas such as procurement, customer service and logistics. And it cut 1,000 jobs held by contractors in 2013.

Mondelez had about 107,000 employees at the end of 2013.

Mondelez also announced Wednesday that it plans to push its $3.9 billion coffee business into a new company next year being formed with D.E Master Blenders 1753. It will retain a 49 percent stake in the coffee-focused company, which will be called Jacobs Douwe Egberts, after brands from both companies. Jacobs will be led by executives from D.E Master Blenders, the international coffee company that used to be part of Sara Lee. The combined company's annual revenue will exceed $7 billion.

That deal was in the planning stages for months, according to both parties. Rosenfeld said she and the Mondelez board started discussing the idea last summer.

The new coffee company will give Mondelez and D.E Master Blenders a better opportunity to focus on coffee and stand out in the nearly $81 billion global market. Nestle SA is the leader in the industry, followed by Mondelez and D.E Master Blenders.

Rosenfeld and D.E Master Blenders Chairman Bart Becht each praised the technology, geographic reach and brands that the other company will bring to the new company, which will be based in the Netherlands. Mondelez is set to receive after-tax cash proceeds of about $5 billion once the combination is completed, expected during 2015.

Rosenfeld said Mondelez approached D.E Master Blenders early last fall about combining the businesses. More serious discussions began at the end of 2013, Becht said.

Discussions with Mondelez's management team "were underway well before" Peltz joined the company's board, Becht said, adding that he did not speak with Peltz as part of this transaction.

Peltz, CEO and a founder of Trian Fund Management, had long been pushing for better performance from Mondelez. Trian, one of Mondelez's largest shareholders, declined to comment on the announcements Wednesday.

Mondelez said its coffee business has outpaced market growth since 2010, helped by products such as the Tassimo on-demand brewing system. The company's coffee unit generated about $3.9 billion in revenue last year, or about 11 percent of the company's total revenue.

Retaining a significant stake in the combined company will allow Mondelez to benefit from the growth of the coffee category, Rosenfeld said. The coffee category is still "very attractive," growing, and has good margins that are above Mondelez's average, she said.

Mondelez said it expects to use most of its cash proceeds from the deal to buy back more shares, subject to board approval, to reduce debt, and for general corporate purposes.

Morningstar analyst Erin Lash said she was disappointed that the company intends to use so much of the cash from the deal to repurchase what she considers its "overvalued" shares.

Along with the two major overhaul announcements, Mondelez tempered its expectations for 2014 because of some slowness in its categories, slower growth in emerging markets and the effect of foreign currency rates. Also, Mondelez posted a better-than-expected first-quarter profit.

Adjusted earnings of 39 cents a share topped Wall Street expectations for a profit of 35 cents a share for the period ended March 31. Revenue rose 2.8 percent, excluding factors such as acquisitions, divestitures and foreign currency rate fluctuations. On a net basis, the company's profit plunged 70 percent, to $163 million, or 9 cents a share, and revenue fell 1.2 percent, to $8.64 billion.

The company said it expects to earn $1.67 to $1.72 a share this year, down from a target of $1.73 to $1.78, because of the effect of changing currency rates. It expects sales to grow 3 percent, down from a forecast of 4 percent, citing the slowing growth in the global snacks business.